Icahn Salivates Over Apple's Cash Trove

Corporate raider Carl Icahn may be good for Apple's share prices, but it's not likely his manipulations will be good for the company. Icahn reportedly asked CEO Tim Cook to borrow and set aside $150 billion for share buybacks. "He wants to make a tidy profit," said tech analyst Rob Enderle. Basically, he's seeking to bleed Apple's cash reserve."

Apple shareholders rejoiced when noted corporate raider Carl Icahn tweeted that he'd taken a large position in the company.

Its shares closed at US$497.91 on Thursday, down 59 cents from Wednesday's close. However, that was up 96 cents from Thursday's opening price. Trading was volatile on Thursday, with prices climbing above $500 at least once.

The surge might have been due to Icahn saying that Apple shares were undervalued and that he had discussed the possibility of Apple increasing its share buyback with CEO Tim Cook.

However, Icahn's motive for the purchase, and his tweets about it, are open to question. Could he be setting the stage for a price surge in order to sell at the peak and get out? Or might he want to restructure Apple like he did TWA after a hostile takeover back in 1985?

"Icahn is a corporate raider," Rob Enderle, principal analyst at the Enderle Group, told MacNewsWorld. "They pull money out of firms in trouble."

The Power of the Tweet

Icahn tweeted twice about Apple on Tuesday.

The resulting surge in Apple's stock price -- it closed at $489.55 -- increased the company's market capitalization by $12.5 billion in a single day.

To put things in perspective, Icahn's tweets only accelerated the Apple's upward trend. It had already gained 15 percent since announcing its Q3 earnings July 23.

Why Apple Looks Yummy

Apple may look ripe for the plucking. There have been questions about Cook's ability to keep the company at the forefront of the market.

Further, Cook has done something his predecessor, the late Steve Jobs, adamantly refused to do -- he instituted a share buyback program and began paying out dividends. In Apple's fiscal Q3 alone, the company paid out $18.8 billion in cash and stock repurchases.

"In general, if you've got a lot of new product innovations and ideas, you'd have a good use inside the firm for that money," Dan Twing, president and COO of
Enterprise Management Associates, told MacNewsWorld. "One view is that if you're buying back your own stock, you don't have a better use for those funds."

Another appetizing point about Apple is that it has a negative cash conversion cycle, meaning it gets paid by customers before it has to ante up to its suppliers.

Also, Apple is cash-rich, with close to $147 billion in cash and other short-term investments.

What Icahn Might Want

Icahn reportedly has asked Cook to borrow and set aside $150 billion for share buybacks.

One possibility is that Icahn wants to loot Apple's kitty.

"He wants to make a tidy profit on his purchase and needs the extra dividend to do that," Enderle surmised. "Basically, he's seeking to bleed Apple's cash reserve."

In this, Icahn is not alone; Apple
was sued recently by Greenlight Capital's David Einhorn, who demanded more payouts to investors. Cupertino bought peace in April with the announcement that it had set aside $100 billion for share buybacks.

Another possibility is that Icahn wants to break up Apple and sell it to maximize his profits.

"We have for a long time thought Apple has missed a huge opportunity in the corporate world with its desktops," EMA's Twing said. Apple's main focus is on its mobile business, but sales in the U.S. market are slowing, and the company has little presence in emerging markets, where the growth is.

Icahn might be seeing the opportunity for growth in Apple's desktop business, which he might consider undervalued, Twing speculated. "It might have tremendous value in the hands of somebody who isn't totally focused on the mobile market."